California's pot banking woes: Cash only is no future for billion-dollar industry

Pot shops will soon be able to legally sell cannabis to anyone who wants it. But what will they do with all that cash?

Unless California comes up with a plan, businesses will need to hide it — because major banks don’t want it.

Despite passage of Proposition 64 last November, the sale of cannabis remains illegal under federal law — so it’s a largely cash-only enterprise, no different than the back-alley dealing that voters sought to eliminate.

Worried about the financial future of California’s nascent marijuana industry, state treasurer John Chiang and the 16-member Cannabis Banking Working Group — representatives from law enforcement, banks, regulators and local governments — met Monday morning at Oakland City Hall to hear testimony about the industry’s challenges and find a solution to the state and federal conflict.

“We hope to find some field within this deep forest where people can have a sense of what the rules and standards are, so they can decide how much risk they want to take on, what practices they choose to engage in,” said Chiang.

An all-cash economy is not only dangerous, but stunts the growth of the cannabis industry and is inefficient, causing city governments to lose tax revenue, said Joe DeVries, assistant to Oakland’s city administrator.

“This is the only industry that is begging to pay taxes, the only industry that is begging to be regulated,” said DeVries. “The safer it becomes, the safer for consumers and the better for governments.”

To pay taxes, “people are coming in with backpacks full of cash. This is not only unsafe but it takes time to count. We have to hire additional staff to sit and count the money,” said DeVries. “That is what cities will have to deal with” if the state doesn’t make the pot business as legitimate as other industries.

It’s not an entirely new challenge. For years, medical marijuana dispensaries and growers have been forced to use cash to pay their employees, rent, utility bills, taxes and other expenses — putting themselves at great danger.

But the problem will be magnified once licenses are issued for recreational sales on January 1, 2018. California’s cannabis industry is expected to bring in an estimated $1 billion in new tax revenue, according to the Legislative Analyst’s Office.

Anxieties about the all-cash economy have heightened since last June’s fatal attack on a security guard at a suburban Denver pot store. Industry leaders compare dispensaries to jewelry stores full of diamonds — untraceable and uninsurable.

“We can’t take credit cards. We can’t get access to capital. We can’t get credit lines. We can’t normalize our banking relationships. Every bank we talk to doesn’t want to talk to us,” said Larry Thacker, CEO of Caliva, San Jose’s largest dispensary. “I implore you to help us come up with a solution that dramatically lowers the risk to our business.”

“I have been kicked out of our finest banks, such as Bank of America and Wells Fargo. Our local credit union kicked us out,” Debby Goldsberry of Magnolia Wellness, an Oakland-based medical marijuana dispensary, said in an interview last week.

Growers face similar hardships.

“Banking is a nightmare,” said grower Kaiya Bercow, CEO of Santa Cruz-based Utopia Farms, which is paid for its product by dispensaries entirely in cash. “We do currently have bank accounts, but the vast majority of our finances are handled in cash… Numerous local and national banks have closed our accounts once they discover we are a cannabis company and are ‘high risk.’ ”

Even ancillary businesses — shops that sell grow lights or irrigation equipment, for instance — must also be cash-based, according to Monday’s panelists.

Here’s the problem: Because federal drug laws consider cannabis a controlled substance, it’s a crime to handle any of the financial proceeds of its sale. And U.S. Attorney General Jeff Sessions, who opposes legalizing recreational marijuana, is unlikely to change that.

So any bank with a marijuana-based customer risks losing accreditation and could even face money laundering charges.

Meanwhile, even though the federal government doesn’t recognize the legitimacy of marijuana, it collects taxes on sales.

A few small banks have been willing to follow strict compliance guidelines under a memo issued by former U.S. Deputy Attorney General James Cole that was later followed by a recommended road map issued by the Financial Crimes Enforcement Network.

But these Obama-era memos don’t guarantee blanket protection against prosecution by President Trump’s Administration. While Sessions has signaled that the Department of Justice under his leadership won’t launch a wide-ranging crackdown on cannabis businesses, he is unlikely to ease financial reforms.

“There are many banks that are afraid,” Tom Schultz, president of Connecticut Pharmaceutical Solutions, a prominent medical marijuana producer and research firm, said in an interview last week.

A few smaller banks are willing to do business — but it’s laborious, expensive and risky, so they are staying quiet about their cannabis transactions. They tend to be local banks, “where you know the president and the compliance officers’ concerns,” said Schultz. “I won’t identify them because they really don’t want their phone ringing off the hook.”

Joe Lindsey of San Jose’s Elemental Wellness did not reveal the name of his dispensary’s bank, saying simply: “What I can tell you is, we do have a working relationship with a banking institution, and we are able to accept credit cards for purchases.”

If California establishes a state bank, it needs permission from the federal government’s Federal Reserve.

One possible fix for California’s banking troubles is to create small and self-sufficient “public banks” for the cannabis industry that are independent from the Federal Reserve, said Monday’s speakers.

In Washington, D.C., some members of Congress have made efforts to alleviate the problem, but attempts have failed to move very far.

The best strategy may be for marijuana-legal states — California, Colorado, Washington, Oregon and others — to band together and press for answers in Washington about banks’ risk of prosecution, said Chiang.

“Hopefully we can leverage our power, with other states and private entities, to get clarity about what will happen with this administration and Congress to see if existing guidelines will stay in place or if there will be radical change,” he said.

“We will have a huge unfolding beginning next year, that will be of deep consequence to the state,” said Chiang. “California is going to have a set of procedures and protocol in place.”